Lead Opinion
In this appeal from the Court of Chancery, we address the question of whether a corporation, subsequent to a cash-out merger, may be required to pay the difference between the merger price and the appraisal value for shares mistakenly tendered prior to the appraisal determination. The Court of Chancery, in granting summary judgment in favor of the shareholders’ agents, ruled that, under the circumstances of the inadvertent tender, shareholders who had perfected their appraisal rights were entitled to the benefit of the appraisal award plus interest on the difference.
We conclude that, under the Delaware statutory framework which governs appraisal proceedings, a perfected claim for appraisal of stock is not lost through an inadvertent tender which would have the effect of dismissing the shareholder from the appraisal action without court approval. We further conclude that the Court of Chancery properly exercised its discretion in the award of interest. Accordingly, we affirm.
I
This appeal arises out of the August 13, 1985 short-form merger betwеen Drummond Company, Inc. (“Drummond”) and Alabama By-Products Corporation (“ABC”) under which Drummond became the surviving entity. Under the terms of the merger, the minority shareholders of ABC were cashed out at $75.60 per share. On the date of the merger, Cede & Co. (“Cede”) was the shareholder of record, in the aggregate, of approximately 8,443 shares of ABC Class B common stock. Cede held 2,440 shares on behalf of Shearson Lehman Brothers, Inc. (“Shear-son”) which, in turn, held the stock for the beneficial owner, Amy N. Ager (“Ager”). Cede was also the record holder of 700 shares of ABC Class B common stock for appellee Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) which held the shares on behalf of the beneficial owners, Harald L. Smyer and Sidney W. Smyer (“Smyers”).
On August 25, 1985, ABC sent a Notice of Merger to all ABC shareholders pursuant to 8 Del.C. § 262(d)(2). Cede thereafter perfected appraisal rights for approximately 7,168 Class B shares, including the Merrill Lynch and Shearson shares in its name, thereby rejecting the merger price.
The parties engaged in extensive discovery during the following year. On May 5, 1987, while the appraisal action was pending in the Court of Chancery, Merrill Lynch, inadvertently and without the knowledge of the beneficial owner, notified ABC’s transfer agent, AmSouth Bank, N.A. (“AmSouth”), that Cede wished to redeem 400 of its 700 shares for the $75.60 per share merger consideration.
On July 30, 1987, the Court of Chancery entered an order (“July Order”) which, inter alia, established certain procedures for verifying the status of the stockholders in the pending appraisal action. The terms of the July Order required ABC to file a Stockholder Information Form (“SIF”) for each stockholder who had demanded appraisal. The order directed ABC to specify the share ownership for each shareholder on the verified list and, in the event “ABC object[ed] to the right of appraisal of any stockholder on the Verified List,” to “state specifically the grounds for the objection(s).” Among the grounds for objection that could be asserted by ABC was either (i) an acceptance of the merger consideration, or (ii) a withdraw of demand for appraisal and receipt of payment for shares in the amount of the merger consideration. The July Order also established a date for an Entitlement Hearing at which the court would determine the appraisal rights of any shareholder to whom ABC objected in the SIF.
ABC originally sent Cede five SIFs, each of which stated that Cede demanded appraisal for 700 shares of ABC common stock.
2,440 shares were held by Shearson-Leh-man Brothers, Inc. for its customer, Amy N. Ager.
CEDE & Co. for Merrill Lynch, Pierce, Fenner & Smith, Inc. who in turn is holding shares for the beneficial owners of Alabama By-Products Corp. Class B stock.
Harald L. Smyer account number 435-23539 300 shares.
Sidney W. Smyer account number 435-21306 400 shares.
Although ABC did not contest Cede’s appraisal rights regarding the shares it held for Merrill Lynch and Shearson, it did object to the appraisal demands of several other claimants, including 3,910 total shares held of record by Cede as a nominee for PaineWebber Incorporated (“PaineWebber”) on behalf of several beneficial owners. An entitlement hearing was later held to determine the validity of the demand for appraisal for the PaineWebber shares.
The July Order also directed the Register in Chancery to notify each shareholder determined to be entitled to an appraisal of their shares (whether by ABC’s failure to object in the SIF or following the Entitlement Hearing) within thirty days of such a determination of the number of shares that were entitled to appraisal. The Notice of Entitlement sent to such shareholders advised them to deliver their certificates to the Register in Chancery within sixty days of the mailing of the notice for a notation (stamp) thereon of the pendency of the appraisal action. For whatever reasons, this procedure was never implemented, apparently with the acquiescence of ABC.
The appraisal action proceeded to trial in June, 1989, and, following extensive briefing, the Court of Chancery entered its opinion on August 1, 1990, rejecting the merger price and fixing the fair value of shares seeking appraisal at $180.67 per share. Neal v. Ala bama By-Products Corporation, et al. Del. Ch., C.A. 8282,
The second tender that is the focus of this appeal occurred while the appraisal actiоn was under advisement in the Court of Chancery. On March 14, 1990, Shearson caused Cede to tender the 2,385 shares held in its name to AmSouth. AmSouth transmitted payment based on the $75.60 merger price. Shearson claims that its actions that caused this tender of Cede’s shares were inadvertent and without the consent of the beneficial owners.
In April, 1991, following the affirmance by this Court, the Court of Chancery entered its final judgment and direction for surrender of the certificates entitled to the appraisal price. Drummond thereafter discovered the 1987 surrender by Cede of the 400 Merrill Lynch shares and the 1990 surrender by Cede of the shares it held for Shearson. Drummond, contending that a post-appraisal surrender of shares was a prerequisite to final payment of the appraisal price, refused to pay Cede the difference between appraisal value and merger price for the shares that had been tendered. Asserting inadvertent tenders, Merrill Lynch and Shearson filed motions on behalf of Cede in the Court of Chancery to compel Drummond to pay them the difference between the merger price and the appraisal figure, plus interest on the amount withheld.
In a memorandum opinion, the Court of Chancery granted the motions of Shearson and Merrill Lynch to compel Drummond’s payment of the appraisal consideration to Cede on behalf of Merrill Lynch and Shearson. Neal v. Alabama By-Products Corp., Del.Ch., C.A. No. 8282,
The Court of Chancery rejected Drum-mond’s contention that, because Cede had previously surrendered certain shares and received the merger consideration, it could not “tender” those shares as required by the appraisal order. The Vice Chancellor noted that, while the appraisal statute requires stockholders to surrender their share certificates to participate in an appraisal award, the purpose of this requirement was to prove actual ownership of stock by each claimant. Because the ownership of the negligently tendered stock was not contested, the court concluded that nothing in its order requiring surrender of certificates prohibited Cede from рarticipating in the appraisal award with respect to the shares it held for Shear-son and Merrill Lynch. Accordingly, the court ordered Drummond to pay the difference in value between the merger price and the appraisal award. This is Drummond’s appeal of that judgment.
II
A.
Under Delaware law, the appraisal remedy is “entirely a creature of statute.” Alabama By-Products v. Neal,
The statute governing appraisal proceedings, Section 262 of the Delaware General Corporation Law, sеts forth the specific procedure by which a stockholder may perfect appraisal rights and participate in an appraisal proceeding. Senouf,
A shareholder who elects to seek an appraisal rather than accept the terms of the
[I]t is clear that upon the completion of the steps required to perfect the right to appraisal the stockholder has made an election to withdraw from the corporate enterprise and take the value of his stock — an election which is irrevocable unless one of the [] conditions specified in the statute shall subsequently occur.
Sabath,
From and after the effective date of the merger or consolidation, ... if no petition for an appraisal shall be filed within [120 days after the effective date of the merger], or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance оf the merger or consolidation, either within 60 days after the effective date of the merger or consolidation ... or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court and such approval may be eondi-tioned upon such terms as the Court deems just.
(emphasis added).
Thus, Section 262(k) provides three explicit conditions under which a stockholder’s right to appraisal may cease: (1) if an appraisal petition is not filed within 120 days of the merger; (2) if the shareholder delivers to the corporation written notice of his intention to withdraw his demand for appraisal within sixty days of the merger; or (3) if the stockholder delivers to the corporation a written withdrawal of his demand after sixty days with the written approval of the corporation. See Dofflemyer,
It is manifest that when the shares Cede held for Shearson and Merrill Lynch were surrendered, Cede did not comply with the conditions specified in Section 262(k) to permit its withdrawal from the appraisal action. First, the appraisal complaint was filed on December 3, 1985, within 120 days of the date of the merger, August 13, 1985. Second, Cede did not tender the disputed shares within sixty days of the merger. Third, Cede did not provide the corporation with a written notice of its withdrawal from the appraisal (because each tender was inadvertent), but simply cashed in certain shares. Finally, the fact that Drummond’s transfer agent, AmSouth, actually accepted the tendered shares and remitted the merger consideration does not satisfy the statutory requirement that the corporation consent in writing to the withdrawal of a stockholder’s perfected claim for appraisal. See Sabath,
More importantly, however, neither tender by Cede was approved by the Court of Chancery as required by the plain and unambiguous language of the appraisal statute. Section 262(k) provides that “no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court.” The “court approval” language was added to Section 262(k) in 1976 to codify a Court of Chancery holding that an appraisal proceeding must be treated like a class action for purposes of either dismissal or compromise. See Lutz v. A.L. Garber Co., Inc., Del.Ch.,
This Court has long recognized that an appraisal action is a proceeding in the nature of a class suit. Sabath,
Drummond contends that the Section 262(k) provision requiring court approval was not implicated in this case because Cede was never “dismissed” from the appraisal litigation. Drummond emphasizes that it did not negotiate with Cede or offer it a premium settlement; rather, the action was fully prosecuted to final judgment. Thus, the policy behind the Section 262(k) court approval requirement was not implicated and the vice of selling out the class was avoided. It is argued that, so long as a tendering shareholder has some shares remaining by the time that the appraisal award is determined, he is still a party to the litigation and the appraisal proceeding is not “dismissed” as to him. In any event, Drummond contends that this ease does not concern Section 262(k) because any shareholders who surrendered their shares for the merger consideration before the appraisal award simply were not entitled to payment under Section 262(i) and the express terms of the final judgment of the Court of Chancery. In other words, with respect to the shares Cede held for Merrill Lynch and Shearson, Cede was simply a member of the appraisal class who could not comply with the final order; therefore, there was no need for the Court of Chancery to dismiss Cede, but rather, it just should not pay Cede the appraisal value as to those shares. We find this argument unconvincing.
It is well settled that “parties to an appraisal proceeding cannot voluntarily settle such a proceeding without the approval of the Court of Chancery.” In re ENSTAR Corp., Del.Supr.,
We see no reason to apply a relaxed construction of the appraisal statute with respect to either an inadvertent or voluntary act. Shareholders who tender their appraisal shares inadvertently are subject to the same statutory requirements as those who intentionally attempt to settle their appraisal claims or “sell out” the rest of the class. In either circumstance, the statute requires court approval. In sum, that condition applies whenever shares subject to a perfected claim for appraisal are surrendered after the appraisal petition has been filed in the Court of Chancery. 8 Del.C. § 262(k).
B.
Notwithstanding the failure to comply with the express requirements of Section 262(k) regarding dismissal or withdrawal from appraisal proceedings, Drummond contends that Cede forfeited its right to participate in the appraisal award with respect to the Shearson and Merrill Lynch shares by tendering those shares in exchange for the merger consideration. In support of its position, Drummond relies, inter alia, on two decisions from the Court of Chancery that held that stockholders who surrendered their shares to the surviving corporation could not thereafter participate in an appraisal proceeding.
In LeCompte v. Oakbrook Consolidated, Inc., Del.Ch., C.A. No. 8028, Berger, V.C.,
Drummond also relies upon Engel v. Magnavox, Del.Ch., C.A. No. 4896,
In contrast to the inadvertent tenders by Cede of the Merrill Lynch and Shearson shares, the shareholders in Engel demanded an appraisal and, thereafter, intentionally forwarded their shares to the corporation “under protest.” Thus, the shareholders in Engel deliberately attempted to hedge their position by seeking appraisal and obtaining the merger consideration in the interim. Aside from raising serious equitable considerations, this scenario contravenes the basic principlе underlying the appraisal statute that an investor make an election either to accept the merger consideration or to pursue an appraisal of his shares. See Smith v. Shell Petroleum, Inc., Del.Ch., C.A. No. 8395, slip op. at 6-7,
Drummond next advances a policy argument that corporations should not be required to undertake the immense burden of investigating the potential appraisal status of every share that is surrendered to the corporation after a merger. Drummond notes that, if the beneficial owners (Ager and the Smyers) held their shares in their own name and not through a broker or nominee, they would have signed the transmittal letter and received the merger consideration directly and, therefore, no mistaken tender would have occurred. Drummond argues that the risks of holding stock in a particular manner “cannot be visited upon the issuer,” Senouf,
It is well established that Delaware law does not impose upon the corporation “an affirmative duty to ‘reasonably’ discover the identity of the beneficial owners of shares which were tendered by a nominee in exchange for the merger consideration.” In re ENSTAR,
Certainly, a corporation cannot be blamed for a failure by a nominee or broker to perfect the appraisal rights of the beneficial owner. Senouf,
We do not insist on statutory compliance merely for the sake of formality. By exacting strict compliance in the execution of the demand, the appraisal statute ensures the expedient and certain appraisal of stock. Senouf,
Similarly, once appraisal rights have been perfected, the corporation is properly on notice of which shareholders are seeking the appraisal remedy. At this point, other provisions of Section 262 govern the circumstances by which a shareholder may withdraw from the appraisal process. If the statute imposes a bright line for compliance, it does so for the benefit of all parties to the appraisal proceeding. Because it was uncontested that Cede had perfected appraisal rights with respect to shares it held on behalf of Merrill Lynch and Shearson, Drummond cannot complain that it lacked at least constructive notice of the appraisal status of both inаdvertent tenders. Thereafter, the corporation was entitled to look to the statute to determine whether there had been any change in the status of shareholders seeking appraisal. Under such circumstances, the rale regarding the risks attendant to nominee share ownership is inapposite. In contrast to earlier decisions, our decision today does not “embroil merging corporations in a morass of confusion and uncertainty, none of which was of their making.” Senouf,
We recognize that our decision may impose upon the corporation the responsibility of overseeing the surrender of shares after a merger. We do not believe that this burden is particularly onerous, considering the level of administrative duties which corporations normally undertake in the preparation and execution of a merger. Nevertheless, it is worth noting that this entire controversy could have been avoided if the parties had utilized the notation or “stamping” procedure under Section 262(g) as required by the July Order.
Under the Delaware appraisal scheme, the rights of the corporation vis-a-vis the appraisal petitioners are reciprocal. A shareholder’s right to appraisal vests at the time of perfection, and that right may cease only upon strict compliance with one of the conditions set forth in Section 262(k). As the Vice Chancellor noted, if the appraisal award had
C.
Incident to the first oral argument before a panel of this Court, the parties were directed to file supplemental memoranda to address the question of whether a member of an appraisal class loses standing to participate in the appraisal action if he later inadvertently surrenders his shares and accepts the merger consideration. We now address this issue.
As a preliminary matter, a party must have standing to sue in order to invoke the jurisdiction of a Delaware court. Stuart Kingston, Inc. v. Robinson, Del.Supr.,
The standing doctrine has assumed speciаl significance in the area of corporate law. For example, in order to have standing to initiate a shareholder derivative suit, a plaintiff must have been a shareholder at the time of the challenged transaction, as well as at the commencement of suit. 8 Del.C. § 327; see also Ch.Ct.R. 23.1; Schreiber v. Bryan, Del.Ch.,
Since derivative standing is dependent upon the ownership of stock, “[a] plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.” Lewis,
A close analysis of the nature of the derivative action as it developed in equity, however, persuades us that its strict standing requirements are inapplicable here. In simplest terms, the derivative action is a litigation device that enables shareholders to sue on behalf of the corporation where those in control of the company refuse or fail to assert a claim belonging to it. Aronson v. Lewis, Del.Supr.,
It is a fundamental principle of the Delaware General Corporation Law that directors, rather than shareholders, manage the business and affairs of the corporation. 8 Del.C. § 141(a); Levine,
The derivative action is one method by which shareholders may seek redress on behalf of the corporation for an alleged harm caused by the misuse of managerial power. Pogostin,
In recognition that the shareholders’ ability to commence a suit on behalf of the corporation inherently impinges upon the board’s authority to manage the business and affairs of the corporation, Delaware law imposes certain prerequisites on a stockholder’s right to sue in a derivative capacity. Id. For example, Chancery Rule 23.1 limits the right of a shareholder to prosecute a derivative suit to those situations where the stockholder has demanded that the board pursue a corporate claim and is met with a wrongful refusal, or where demand is excused because the directors are incapable of reaching an impartial decision to pursue such litigation. Rales v. Blasband, Del.Supr.,
The continuous ownership requirement similarly recognizes the power of the board to managе the business and affairs of the corporation. Essentially, a shareholder is permitted to intrude upon the authority of the board by means of a derivative suit only because his status as a shareholder provides an interest and incentive to obtain legal redress for the benefit of the corporation. Once the derivative plaintiff ceases to be a stockholder in the corporation on whose behalf the suit was brought, he no longer has a financial interest in any recovery pursued for the benefit of the corporation. As stated by the Seventh Circuit:
because a shareholder will receive at least an indirect benefit (in terms of increased shareholder equity) from any corporate recovery, he has an adequate interest in vigorously litigating the claim. A non-shareholder or one who loses his share*266 holder interest during the course of litigation may lose any incentive to pursue the litigation adequately.
Portnoy v. Kawecki Berylco Industries, Inc., 7th Cir.,
While the line of separation between derivative and corporate class actions is sometimes obscure, the derivative and appraisal actions are clearly distinct. The obvious difference between the two proceedings is that an appraisal petitioner sues in his own right instead of on behalf of the corporation. In an appraisal proceeding, the cause of action, as well as any recovery, belongs to the dissenting shareholders, not the corporation. Kramer,
An appraisal petitioner does not seek to recover for harm done to the corporation, but rather, the shareholder merely seeks to obtain the fair value of his shares. In fact, the shareholder is divested of the usual rights incident to share ownership upon his demand for appraisal. Cede & Co. v. Technicolor,
We conclude, therefore, that the continuous stock ownership requirement needed to maintain standing in derivative actions does not apply in the context of an appraisal proceeding. Any nexus between stock ownership and standing is controlled by the statutory scheme. Once a shareholder has perfected his claim for appraisal, he may not terminate that сlaim without complying with Section 262(k). The inadvertent tenders by Cede had no effect on its standing to participate in the appraisal award, so long as it remained a proper party to the appraisal action within the strictures of the statute.
Ill
Subsequent to his initial appraisal decision, the Vice Chancellor, acting pursuant to 8 Del.C. § 262(h), entered judgment against Drummond for $180.67 per share, plus simple interest thereon at the rate of 12.5% per annum, payable from the date of the merger until the date of the final payment by Drummond. In a form entitled “Stipulation and Order as to Payment, Disbursement and Satisfaction of the Judgment,” the parties thereafter stipulated and agreed that all share cei’tificates must be surrendered to AmSouth by November 15, 1991, to be entitled to the appraisal award plus interest.
Once the Court of Chancery determined that Cede did not withdraw from the appraisal class by virtue of the mistaken tenders, the court ruled that Cede was entitled to the same rate of interest as the other stockholders who sought the appraisal remedy. Accordingly, the court directed Drummond to pay 12.5% simple interest upon $180.67 per share from the date of the merger until the date that Cede was paid the merger consideration for Shearson and Merrill Lynch. Drummond was also directed to pay Merrill Lynch and Shearson 12.5% simple interest upon $105.07 (the difference in merger price and appraisal value) from the date each petitioner was paid the merger consideration until the date the final amount was paid by Drummond.
The decision to award either pre-judgment or post-judgment interest is entirely within the discretion of the Court of Chancery. Bell v. Kirby Lumber Corp., Del.Supr.,
Here, the interest award was neither arbitrary nor capricious. “The purpose of interest is to fairly compensate the stockholders for their inability to use the money during the entire period in question.” Bell v. Kirby Lumber,
IV
In conclusion, we hold that strict compliance with Section 262 is necessary for a shareholder to withdraw or be dismissеd from an appraisal action. Once an appraisal petition is filed, those shareholders who have perfected appraisal rights may be dismissed from the action only upon approval by the Court of Chancery. A perfected claim for appraisal is not lost through an inadvertent tender of appraisal shares in the absence of compliance with the procedures explicitly set forth in Section 262. Finally, the continuous ownership requirement for standing in derivative actions does not limit the ability of shareholders to participate in appraisal proceedings so long as such shareholders are in compliance with statutory standards. Accordingly, the judgment of the Court of Chancery granting the motions of Merrill Lynch and Shearson on behalf of Cede to compel payment by Drummond of the appraisal award is AFFIRMED. We likewise AFFIRM the judgment of the Court of Chancery awarding the petitioners interest at the rate of 12.5% per annum.
Notes
. By letter dated September 6, 1985, Cede informed ABC of its demand for appraisal of 2,440 shares which were held for Shearson and were beneficially owned by Amy N. Ager. Although the record before this Court does not reflect the date of Merrill Lynch’s appraisal demand, it is undisputed that Cede likewise perfected apprais
. Drummond was later added as a defendant as the successor in interest to ABC.
. Cede authorized Merrill Lynch to act for it with respect to those 700 shares.
. According to an affidavit submitted by R. Weaver Self, a former Senior Vice President and Treasurer of ABC, it was not uncommon for shareholders to tender their certificates for the merger consideration throughout this period of time. In accordance with ABC's practice, those stockholders who had chosen to receive the merger consideration would submit their share certificates along with a letter of transmittal to AmSouth for payment. AmSouth would then issue a check to the shareholder who surrendered the shares, and, in turn, AmSouth would notify Drummond of the total number of shares that had been transmitted and redeemed that day. Drummond would then reimburse Am-South for the surrendered shares. During this procedure, AmSouth apparently notified Drum-mond of the total number of shares tendered without indicating the identity of each tendering shareholder.
.In addition to the appraisal demands for the Merrill Lynch and Shearson shares, Cede had also demanded appraisal with respect to shares it held for J.C. Bradford & Co., Chase Manhattan Bank, and Stearne, Agee & Leach, Inc., as well as shares which it held in its own name.
. The other disputed appraisal claimants settled their claims with ABC.
. Both Merrill Lynch and Shearson paid their respective beneficial owners the full amount to which they were entitled under the judgment in exchange for an assignment of the beneficial owners’ rights to the appraisal award.
. The court applied the same reasoning to the Shearson shares.
. The agreement between AmSouth and ABC provided, in pertinent part, that the transfer
. Of course, "the statutory procedure in appraisal cases makes it a special classification of a class lawsuit and not just a general class action.” Lutz,
In an appraisal proceeding, however, shareholders enter the appraisal class by complying with the statutory formalities required to perfect their appraisal rights. Thus, shareholders seeking appraisal "opt in” to a class, invariably before suit is even filed, rather than "opt out.” "The appraisal petition, which may be filed either by the stockholder or the surviving corporation, is simply the means provided for enforcing the stockholder’s right to have his shares evaluated or the corporation’s correlative right to obtain his shares upоn payment thereof.” Lichtman v. Recognition Equipment, Inc., Del.Ch.,
. Section 262(g) provides in pertinent part:
(g) ... The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder.
. The long-recognized policy behind Section 327 is to prevent strike suits whereby an individual purchases stock in a corporation with purely litigious motives, i.e., for the sole purpose of prosecuting a derivative action to attack transactions which occurred prior to the purchase of stock. Schreiber v. Bryan,
Dissenting Opinion
(Retired), dissenting:
I regret that I cannot join in the opinion in which a majority of the Court has invested so much research and scholarship. But, as with many legal issues, the answer often depends on how the question is defined. As I see it, the determinative question which this appeal presents concerns the stockholder requirements of 8 Del.C. § 262.
Before discussing the statute, I want to note that the minority stockholders of Alabama By-Products Corporation (ABC) were cashed out at $75.60 per share; in the appraisal proceeding the Court of Chancery fixed the fair value of each share at $180.67 and this Court affirmed that ruling. The difference between the cash-out price and the fair value of each share is shocking, and that lends equitable persuasion to the judgment of this Court and the Court of Chancery.
But the appraisal remedy is entirely a creation of statute, Alabama By-Products Corp. v. Neal, Del.Supr.,
The purpose of Section 262 is to give a stockholder who dissents from a merger a judicial remedy by which an independent determination is made of the fair value of the shares. Neal, 588 A.2d at 256.
At least from the time of Salt Dome Oil Corporation v. Schenck, Del.Supr.,
It is, I believe, undisputed that Cede & Co. (Cede), and only Cede, was the record holder of the stock in issue for which appraisal was sought. To state it negatively: neither Shearson Lehman nor Merrill Lynch, nor the customеrs of either of them, was, at any relevant time, a registered or record holder of the stock.
Demand for appraisal and perfection of that right was, in each instance, made by Cede as the record stockholder. And at the time the demands were perfected, the rights and duties of the stockholder and the corporation were fixed. Compare Southern Production Co. v. Sabath, Del.Supr.,
Without doubt, Cede had contractual (and perhaps other) obligations to Shearson Lehman and Merrill Lynch which, in turn, had obligations to their respective customers. But under Section 262 and long-settled case law, ABC had no appraisal obligation to the brokerage houses, bank depositories or other nominees which investors had chosen to hold their respective shares. Salt Dome,
But the majority seems to regard Cede’s record holding of ABC shares as divided into two or more parts. How or whеn that was done is not described. Certainly the Stockholder Information Form submitted by Cede to ABC could not create a Section 262 legal duty on the corporation to thereafter deal with Shearson Lehman and Merrill Lynch as it would with a record holder. And yet that is the clear implication if ABC is liable because the brokers were paid without Court approval.
Given the possible relationships which may lay behind a stockholder of record, the responsibility for “overseeing” the surrender of shares after a merger may well be more complex and burdensome than the majority anticipates. One may reasonably ask, for example, does the duty of oversight oblige a corporation to ask a nominee: for whom do you act? — thus piercing the veil of record ownership.
The majority states that it continues to recognize the force of Salt Dome, ENSTAR and similar cases holding that a corporation may look to the corporate books as the sole evidence of stock ownership. But, respectfully, its decision here fixes liability on ABC, (a) for failing to look beyond Cede’s record ownership to the stockbrokers who had deposited the shares with Cede; and (b) for failure to regard the brokers as “stockhold
In sum, Cede was the only stockholder in this proceeding and it never withdrew from this litigation. Indeed, it is still in the case. Thus, “no appraisal proceeding in the Court of Chancery [has been] dismissed as to any stockholder.” See Section 262(k). As I see it, the statute is not implicated because Cede remains in Court, subject to its jurisdiction and responsible for any violation it may have made of Section 262.
ij; tfc % ífc #
I agree that strict compliance with Section 262 is essential and when it is applicable it should be specifically enforced.
If the policy purpose of Section 262(k) is therapeutic, that is, to bar a stockholder and the corporation from agreeing, without court approval, that some shares of an ongoing claim for appraisal ai’e withdrawn, then the statute should be amended to say so. But the plain language of Section 262(k) bars only a “dismiss[al] as to any stockholder.” When, as here, there is neither a dismissal nor a record stockholder involved, the language does not fit the facts.
In its present form, Section 262 probably dоes not recognize the common and practical use of nominees in stock ownership and the realities of relationships behind the corporate record. If so, then change is desirable; but creation of a duty of “oversight” by the corporation is not the way to go. Under the present statute, orderliness and certainty of an appraisal proceeding will be maintained if, as heretofore, a corporation’s legal duty is to deal only with the stockholder of record. Cf. Schneyer v. Shenandoah Oil Corporation, Del.Ch.,
I would reverse the Order of the Court of Chancery and direct that judgment be entered for the respondents.
. The Court quoted and reaffirmed the policy reasons stated in Salt Dome as to why the corporation “may rightfully look to the corporate books as the sole evidence of membership," i.e., the record holder of shares.
. The rather curious caption of the case describes the petitioners as follows:
CEDE & CO. acting on behalf of Shearson Lehman Brothers, Inc. and Amy N. Ager and MERRILL LYNCH, PIERCE, FENNER & SMITH, acting on behalf of CEDE & CO. Implicitly, that accurately states that this is
Cede's case — while it acts for Shearson Lehman and Merrill Lynch acts for it. In short, only Cede’s rights are asserted and those are based on its status as the record holder of ABC shares.